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B. G., Opalesque Geneva:

Last year's historically large and rapid tightening is starting to constrict the financial system and slow the economy, say Bob Prince, Greg Jensen and Karen Karnio-Tambour, co-CIOs at Bridgewater in a recent report. This is necessary and will need to be sustained to restore equilibrium conditions. In the meantime, the CIOs now favour cash in relation to assets in most developed economies and they favour assets in relation to cash in Japan, China, and much of Asia.

The tightening cycle began roughly one year ago. It takes about that long for a tightening to have significant economic impacts, and signs are emerging that the effects are now spreading and deepening. A tightening cycle is a cycle of interest rate hikes.

Economies and markets are far from equilibrium conditions

The three equilibriums, as defined by the CIOs, are: spending and output in line with capacity, debt growth in line with income growth, and a normal level of risk premiums in assets relative to cash. They are maintained by monetary policy and fiscal policy.

The greatest disruption of equilibrium today remains the high level of nominal spending, which, when compared to the ability of the economy to produce more, leads to inflation rates that are significantly above target. The economies of the US, Europe, and the UK have veered and remain quite far from equilibrium conditions for similar reasons, and this is leading to big policy shifts and high mark......................

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